The Upper Tribunal decision in Laing O’Rourke Services Ltd v HMRC; HMRC v Willmott Dixon Holdings Ltd [2023] UKUT 155 (TCC) confirmed that where staff drive their own cars on business (e.g. staff who take a car allowance) then both NIC and income tax relief must be given on the difference between the 45p statutory rate and the rate actually reimbursed by employers. Employees are able to claim income tax relief if they so wish on a P87 or via self assessment, but employers must give relief against the car allowance via the payroll at the time the car allowance is paid. Not giving relief at source amounts to an unlawful deduction under the Employment Rights Act 1996 s 13.
The background to this is that, in 2001, the government replaced the old fixed profit car scheme rules with the approved mileage allowance payment rules or AMAPs. The legislation is set out in ITEPA 2003 ss 229-236, with NIC regulations incorporated into Social Security (Contributions) Regulations, SI 2001/1004, by SI 2002/307, giving both NIC and income tax relief to drivers for mileage driven in their own cars.
Most taxpayers were simply not aware of these rules and so have deducted employee NIC, as well as paying secondary class 1 NICs on the whole car allowance, even though SI 2001/1004 reg 25 and Sch 3 Part VIII para 7A mandate that the qualifying amount (QA) must be disregarded from earnings. QA is M x R where M is number of business miles undertaken and R is the 45p rate
(reg 22A(4)). If an employee has already received, say, 10p per mile via expenses or a fuel card, then the effective disregard is only 35p per mile (i.e. the difference between rate paid and maximum possible 45p rate).
A number of taxpayers put in protective claims once they realised that they had been over-deducting NIC on car allowances or not giving the disregard mandated by statute. Laing O’Rourke was the first taxpayer to receive a section 8 determination, closely followed by Willmott Dixon, meaning that they could enter the tribunal process and have their appeals heard – which they won at the Upper Tribunal. HMRC are not appealing the decision. This means that if you have paid car allowances and also reimbursed staff for mileage at less than the statutory 45p a mile then (a) you have a legitimate claim to ask HMRC to refund you for NIC paid in error on the car allowance and (b) you need to make sure that the statutory relief (or disregard) is given at source via the payroll going forward with immediate effect (e.g. say a driver on a £500 a month car allowance undertakes 1,000 business miles and is reimbursed only 10p a mile then you have to split the car allowance into two elements: the first £350 is taxable and NIC free, and the balancing £150 is taxable and subject to NICs). If an employee does 2,000 business miles, then the whole of the car allowance is NIC free but you cannot carry forward, or backward, or sideways, the excess £200 (35p x 2,000 - £500).
Whether claiming prospectively or retrospectively, robust and compliant mileage records will be required in order to give the correct relief at source every month for a successful reclaim, since HMRC will not allow extrapolation. So even if you don’t plan to pay any business mileage, you still need to record it in real time in order to disregard it from the car allowance before NIC is applied.
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Laing O’Rourke: NICs on car allowances
The impact of a recent Upper Tribunal judgment.
The Upper Tribunal decision in Laing O’Rourke Services Ltd v HMRC; HMRC v Willmott Dixon Holdings Ltd [2023] UKUT 155 (TCC) confirmed that where staff drive their own cars on business (e.g. staff who take a car allowance) then both NIC and income tax relief must be given on the difference between the 45p statutory rate and the rate actually reimbursed by employers. Employees are able to claim income tax relief if they so wish on a P87 or via self assessment, but employers must give relief against the car allowance via the payroll at the time the car allowance is paid. Not giving relief at source amounts to an unlawful deduction under the Employment Rights Act 1996 s 13.
The background to this is that, in 2001, the government replaced the old fixed profit car scheme rules with the approved mileage allowance payment rules or AMAPs. The legislation is set out in ITEPA 2003 ss 229-236, with NIC regulations incorporated into Social Security (Contributions) Regulations, SI 2001/1004, by SI 2002/307, giving both NIC and income tax relief to drivers for mileage driven in their own cars.
Most taxpayers were simply not aware of these rules and so have deducted employee NIC, as well as paying secondary class 1 NICs on the whole car allowance, even though SI 2001/1004 reg 25 and Sch 3 Part VIII para 7A mandate that the qualifying amount (QA) must be disregarded from earnings. QA is M x R where M is number of business miles undertaken and R is the 45p rate
(reg 22A(4)). If an employee has already received, say, 10p per mile via expenses or a fuel card, then the effective disregard is only 35p per mile (i.e. the difference between rate paid and maximum possible 45p rate).
A number of taxpayers put in protective claims once they realised that they had been over-deducting NIC on car allowances or not giving the disregard mandated by statute. Laing O’Rourke was the first taxpayer to receive a section 8 determination, closely followed by Willmott Dixon, meaning that they could enter the tribunal process and have their appeals heard – which they won at the Upper Tribunal. HMRC are not appealing the decision. This means that if you have paid car allowances and also reimbursed staff for mileage at less than the statutory 45p a mile then (a) you have a legitimate claim to ask HMRC to refund you for NIC paid in error on the car allowance and (b) you need to make sure that the statutory relief (or disregard) is given at source via the payroll going forward with immediate effect (e.g. say a driver on a £500 a month car allowance undertakes 1,000 business miles and is reimbursed only 10p a mile then you have to split the car allowance into two elements: the first £350 is taxable and NIC free, and the balancing £150 is taxable and subject to NICs). If an employee does 2,000 business miles, then the whole of the car allowance is NIC free but you cannot carry forward, or backward, or sideways, the excess £200 (35p x 2,000 - £500).
Whether claiming prospectively or retrospectively, robust and compliant mileage records will be required in order to give the correct relief at source every month for a successful reclaim, since HMRC will not allow extrapolation. So even if you don’t plan to pay any business mileage, you still need to record it in real time in order to disregard it from the car allowance before NIC is applied.
